Earnings: Bullish and Bearish Views

1) The strong earnings performances we have seen year to date — particularly in large multinational company earnings — are the single most important argument in the bulls' favor.

2) Recent economic data hints we may have avoided a recession this year. Avoiding an outright recession is important....earnings tend to decline 20 percent or more in those periods. Yes, 1 or 2 percent GDP growth is anemic and not sufficient, but outright negative GDP is far worse.

3) Earnings estimates are coming down, but not as much as bears predicted. For Q3, earnings are now expected to be up 12.6 percent for the S&P 500 (year over year). That's lower than the 16.9 percent estimate on July 1, but not dramatically lower (remember, it is normal for numbers to come down going into the start of the season).

Financials are the brunt of that downward revision: earnings were estimated to be up 14.5 percent on July 1; now they are up only 0.9 percent.

Bulls are insisting these numbers are still too high and will come down.

Numbers have been trimmed slightly for 2012: up 11.5 percent, down from up 13 percent on July 1.

Reasons to be cautious:

1) Guidance: expect a lot of vagueness and caution. Wouldn't you be?

2) It's not clear what kind of earnings multiple investors are willing to pay. Just resolving Europe may not be enough.

Bulls insist that stocks are very attractive on a valuation basis if current earnings expectations can be achieved. I agree, but even if the Europe credit crisis dies down, we are looking at weak growth in Europe.

In this murky environment, will people really pay, say, 15 times forward earnings? I doubt it...maybe now they will only pay 12 times....if we make $105 in the S&P next year, we get 1,260...we're at 1,190 now. That's a modest, 70 point rally. Heck, we rallied 100 points in the last week.

3) It's tough to keep earnings growing. We're running out of room for cost cutting. Operating margins are at an all time high...so to beat numbers, you need more revenue growth.

But that's been a notable laggard all year. Total earnings for the S&P are expected to be up 14.2 percent this year, while revenues are expected to be up only 6.8 percent. You have to be believe in a decent economic turnaround in 2012. That belief is currently in short supply.